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UNDERSTANDING THE MUTUAL INFLUENCE OF
CONTRACT AND SUBCONTRACT TERMS ON
CONSTRUCTION RELATIONSHIPS
عالقات المقاوالت على نصوص العقد وعقد الباطنل االثر المتبادلفهم
By
Elmugtaba Ali Bannaga
Student ID Number: 120004
Dissertation submitted in part fulfilment of the requirements for the degree of MSc
Construction Law and Dispute Resolution
Faculty of Business
Dissertation Supervisor
Prof Dr Aymen Khaled Masadeh
March 2015
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 2
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
DISSERTATION RELEASE FORM
Student Name Student ID Programme Date
Title
“I warrant that the content of this dissertation is the direct result of my own work and that any use
made in it of published or unpublished copyright material falls within the limits permitted by
international copyright conventions.
I understand that one copy of my dissertation will be deposited in the University Library for
permanent retention.
I hereby agree that the material mentioned above for which I am author and copyright holder may
be copied and distributed by The British University in Dubai for the purposes of research, private
study or education and that The British University in Dubai may recover from purchasers the
costs incurred in such copying and distribution, where appropriate.
I understand that The British University in Dubai may make that copy available in digital format
if appropriate.
I understand that I may apply to the University to retain the right to withhold or to restrict access
to my dissertation for a period which shall not normally exceed four calendar years from the
congregation at which the degree is conferred, the length of the period to be specified in the
application, together with the precise reasons for making that application”
Signature
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 3
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Abstract
This dissertation was prepared in an attempt to highlight research points for consideration
by contract drafters in the construction industry upon drafting main contract and
subcontract documents. The research covered points to consider if a firm desires a
subcontract to be treated as a general contract (back-to-back agreement).
The aim of this study was to identify the relationship between main contracts and
subcontracts in construction practice; a construction relationship involves employers and
main contractors on one side, and main contractors and their subcontractors on another
side.
This study aimed to identify the practical influence of the terms of main contracts on
subcontracts and vice versa. Such influences are examined in the particular areas of
common construction terms that are most likely to be influenced as a result of the overall
construction relationship.
The particular areas discussed in this dissertation include some drafting examples and
subjects for the understanding of the mutual influence of contract and subcontract terms
on construction relationships. The main subjects are conditional payment clauses,
liquidated damages, deadlines and dispute resolution. Numerous other sub-points derived
from these main points are duly discussed in this dissertation.
This topic was researched with concentration on UAE and UK laws and is supported with
literature reviews of the civil and common law backgrounds. Particular consideration and
references are given to the FIDIC’s Conditions of Subcontract for Construction 2011.
The topic of this dissertation is seen as an important one because contract drafting is a
sensitive practice that ought to be skilfully performed, and lots of circumstances should
be considered for the purpose of achieving a project that is successful for the employer
and for the other construction parties. Among these considerations are the balancing of
risks between the construction parties and the particular circumstances to consider when
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 4
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
drafting main contracts and subcontracts in general, as well as back-to-back subcontracts
in particular.
ملخص البحث
معدىألخذها فى االعتبار من قبل البحثية بعض النقاط لتوضيح فى محاولة هذه الرسالة اعدادتم
ألخذها فى االعتبار عند محددة عقود المقاوالت ومقاوالت الباطن، هذا البحث يغطى تحديداً مواضيع
عقود الباطن المصاغة بإعتبارها )ظهر بظهر(. إعمالالرغبة فى
ن فى بناًء على ذلك فإن الهدف من هذه الدراسة هو لتحديد العالقة بين العقود الرئيسية وعقود الباط
لمقاولين الرئيسين عمال والمقاولين الرئيسيين من جهة، وكذا اعالقة المقاولة التى تتضمن أرباب األ
ومقاولى الباطن من جهة أخرى.
وذلك من ذلك، هذه الدراسة تهدف الى تحديد اثر شروط العقود الرئيسية على عقود الباطن والعكس
عند التطبيق العملى لهذه الشروط، هذه اآلثار تم بحثها بالرجوع الى بعض من شروط المقاوالت
عالقات المقاوالت.لنتيجة كمن التأثير الشائعة التى يحتمل ان تلقى اكبر قدر
إن المواضع المحددة التى تم بحثها فى هذه الدراسة شملت بعض االمثلة ذات الصلة بصياغة العقود،
ثر المتبادل لنصوص العقد وعقد الباطن على عالقات شملت بعض المواضيع من أجل فهم األأى
( 3( التعويض االتفاقى، )2السداد المشروط، ) ( شروط1المقاوالت، هذه المواضيع الرئيسية هى: )
، كما ان هناك العديد من المواضيع المتفرعة عن هذه ات( تسوية النزاع4المواعيد االخيرة، )
المواضيع الرئيسية تم مناقشتها كذلك ضمن هذا البحث.
لمملكة المتحدة تم تجهيز هذا البحث بالتركيز على قانون دولة االمارات العربية المتحدة، وقانون ا
نجليزى، كما وتم ونظام القانون العام اال الالتينيةستناد على الفقه الصادر من الخلفيات القانونية باإلو
.2111عقد فيديك لمقاوالت الباطن العامة لشروط العلى التركيز تحديداً
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 5
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
هى مسألة وذلك ألن مسألة صياغة العقود من المواضيع المهمةإن موضوع هذه الرسالة يعتبر
اإلعتبار حساسة ويجب ممارستها بعناية، وهناك الكثير من الظروف المحيطة التى يجب وضعها فى
ومن بين ال وهى نجاح المشروع،رب العمل وباقى أطراف المشروع أ جل الوصول الى غاياتمن أ
الوضع فى لمقاولة، وكذا مسألة طراف االمخاطر بين أعتبارات مسألة عمل موازنة لتوزيع تلك اإل
عتبار بعض المسائل الخاصة عند صياغة عقود المقاوالت الرئيسة ومقاوالت الباطن بشكل عام، اإل
عند صياغة عقود المقاوالت )ظهر بظهر( بشكل خاص.كذا و
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 6
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Keywords
Contract, subcontract, contractor, construction, employer, project, payment, privity,
drafting, nomination, laws, agreement, collaboration, documents, FIDIC, Red Book,
liability, warranty, influence, work, back to back, reference, claim, dispute, obligations,
defects, security, certificate, notification, insurance, damages, engineer, supplier,
termination, delay, court.
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 7
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Table of Contents
TABLE OF CASES 10
English Cases 10
UAE Cases 11
French Cases 11
TABLE OF STATUTES 11
UAE Laws 11
UK Laws 12
French Laws 12
TABLE OF STANDARD FORM OF CONTRACTS 12
FIDIC Series 12
The Joint Contracts Tribunal Series (JCT) 13
Institution of Civil Engineers Series (ICE) 13
DEDICATIONS 14
ACKNOWLEDGEMENTS 15
CHAPTER 1 – INTRODUCTION 16
Research Objectives 16
Research Questions 16
Research Scope 17
Research Structure 17
Research Methodology 18
CHAPTER 2 – LITERATURE REVIEW 19
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 8
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
2.1 Introduction 19
2.2 What Is a Construction Contract? 19
2.3 Contractual Collaboration 20
2.4 Back-to-Back Contracts 26
2.5 Privity of Contracts 28
2.5.1 Exceptions to Privity Rules 31
a) Named and Nominated Subcontractors 31
b) Collateral Warranties 34
c) Direct Payment 35
d) Payment Guarantees 36
e) Statutory Exceptions 37
2.6 Incorporation of Main Contract Terms in Subcontracts 38
2.6.1 Incorporation by Reference 41
2.6.2 Incorporation of Terms in UAE Law 41
CHAPTER 3 – SIGNIFICANT CLAUSES OF BACK-TO-BACK
SUBCONTRACTS 43
Introduction 43
3.1 Terms of Payment 43
3.2 Terms of Back-to-Back Payment Arrangements 46
3.3 Terms of Variations and Related Claims 49
3.4 Terms of Performance Security 52
3.5 Terms of Programmes and Extensions of Time 53
3.6 Terms of Defects Notification Period 54
3.7 Terms of Performance Certificates 55
3.8 Terms of Decennial Liability 56
3.9 Effects of the Termination of the Main Contract 58
3.10 Terms of Subcontract Insurance 59
3.11 Terms of Force Majeure Events 60
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 9
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
CHAPTER 4 – EFFECTS OF SUBCONTRACT DISPUTE RESOLUTION
MECHANISMS 63
4.1 Related and Unrelated Claims 64
4.2 Alternative Mechanisms Associated with Related Claims 66
CHAPTER 5 – CONCLUSIONS AND RECOMMENDATIONS 68
END OF DISSERTATION 69
BIBLIOGRAPHY 70
English Books 70
Arabic Books 70
Journals 70
Online Journals 70
Online Articles 71
University Thesis 71
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 10
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Table of Cases
English Cases
- Actionstrength Ltd v. International Glass Engineering IN.GL EN Spa (2003) BLR
207
- Bickerton v. NW Hospital Board [1970] 1 WLR 607
- Chapelton v. Barry Urban District Council (1940) 1 KB 532
- Dunlop Pneumatic Tyre Company Ltd v Selfridge & Co Ltd [1915] AC 847
- Emson Eastern v. EME Developments (1991) 55 BLR 114, 125
- Geary, Walker & Co. Ltd v. W Lawrence & Son [1986] HBC (4th Edition) 2 CA
382
- Gloucestershire County Council v Richardson (1969) 1 AC 480
- Henry Kendall Ltd v. William Lillico Ltd (1969) 2 AC 31
- Hollier v. Rambler Motors (AMC) Ltd (1972) 2 QB 71
- J Spurling Ltd v. Bradshaw (1956) 1 WLR 461
- Martin Grant & Co Limited v Sir Lindsay Parkinson & Co Limited (1984) 29
BLR 31
- McCutcheon v. David MacBrayne Ltd (1964) 1 WLR 125
- Olley v. Marlborough Court Hotel (1949) 1 KB 532
- Parker v. South Eastern Railway Company (1877) 2 CPD 416
- Price v Easton [1833] 110 ER 518
- Shanklin Pier Limited v. Detel Products Ltd (1951) 2 KB 854
- Thompson v. London, Midland and Scottish Railway Co Ltd (1930) 1 KB 41
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 11
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
- Tweddle v Atkinson [1861] EWHC QB J57
- Watson Building Services Ltd v. Harrison (2001) SLT 846
UAE Cases
- (2001) Dubai Cassation 405/2001 CA
- (2001) Dubai Cassation 428/2001 CA
- (2002) Dubai Cassation 462/2002 CA
- (2004) Dubai Cassation 6/2004 CA
- (2005) Dubai Cassation 174/2005 CA
- (2007) Dubai Cassation 150/2007 CA
- (2007) Dubai Cassation 240/2006 CA
- (2008) Dubai Cassation 213/2008 CA
- (2008) Dubai Cassation 266/2008 CA
- (2009) Dubai Cassation 96/2009 CA
French Cases
- (2007) French Court of Cassation 06-14006
Table of Statutes
UAE Laws
- Civil Transaction Code, Law No. 5-1985 amended by Law No. 1-1987 – Articles
1, 132, 246, 249, 252, 420, 422, 880, 886, 887, 890 and 891
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 12
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
- Traffic Act 1995
- Law No. 27-2007 regarding Ownership of Jointly Owned Properties in the
Emirate of Dubai, Article 26
UK Laws
- Statute of Frauds 1677, Section 4
- Contracts (Rights of Third Parties) Act 1999
- Road Traffic Act 1988
- Housing Grants, Construction and Regeneration Act 1996, Section 113
French Laws
- Subcontracting Law 1975, Law No. 75-1334 issued on 31 December 1975,
Article 12
Table of Standard Form of Contracts
FIDIC Series
- Conditions of Subcontract for Construction for Building and Engineering Works
Designed by the employer 2011, Clauses 1.10, 5.2, 8.2, 8.7, 10, 11.2, 11.3, 12,
14.1, 14.7, 15.1, 15.3, 19.1, 20, 20.3, 20.4, 20.6 and 20.9
- Conditions of Contract for Construction 1999 (Red Book), Clauses 4.2, 4.4, 5.2,
5.3, 5.4, 8.7, 13, 14.9, 15.5, 19.1 and 19.7
- Plant and Design-Build Contract 1st Edition (1999 Yellow Book)
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 13
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
The Joint Contracts Tribunal Series (JCT)
- JCT 98 Clause 35.13
Institution of Civil Engineers Series (ICE)
- Clause 59.7
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 14
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Dedications
I dedicate this effort to my beloved parents:
Professor Ali Bannaga
&
Nagat Hasib
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 15
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Acknowledgements
I thank my friends and family who encouraged me to complete this dissertation, as well
as my supervisor, Professor Dr Aymen Khaled Masadeh, who guided me and gave me his
full support and precious time for this work. I extend my fullest thanks to the academic
and administrative staff of The British University in Dubai and my work colleagues and
friends at Bin Suwaidan Advocates Law Firm, all of whom gave me their fullest support
so that I could complete this dissertation.
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 16
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Chapter 1 – Introduction
Research Objectives
The objectives of this research are as follows:
a) To identify and explain the relationship and legal framework taking place
between construction parties, as well as the related legal rules and the exceptions
to such legal rules.
b) To identify what particular terms or consequences of a traditional construction
contract should be taken into consideration by employers, main contractors and
subcontractors when drafting a general subcontract, a group of interlocking
construction and supplier agreements, or a back-to-back construction agreement.
Research Questions
a) What legal options are available in contractual or judicial practice for employers,
main contractors or subcontractors to preserve their rights under a construction
arrangement limited by rules of privity of contracts?
b) How can construction subcontract terms and adopted contract policies affect and
influence the overall construction arrangement or a particular member of the
overall construction arrangement?
c) What drafting mechanisms in contracts should be considered by employers, main
contractors and subcontractors when drafting a general subcontract, a group of
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 17
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
interlocking construction and supplier agreements, or a back-to-back construction
agreement?
Research Scope
This research is limited to the matters and topics associated with the research questions
raised above; the research is concluded with reference to UAE and UK laws, along with
reference to the international series of FIDIC contracts.
Research Structure
This dissertation starts with an introduction in Chapter 1, which describes the objectives,
questions and scope of the dissertation, as well as its structure and methodology.
Chapter 2 covers the literature review about the topic as introduced in regard to the
matters of contractual collaboration between main and subcontract documents. The
literature review also covers other subjects related to the idea of back-to-back contracts,
the principles of privity of contracts, some of the common exceptions to the privity rules
and the incorporation of contractual terms.
Chapter 3 covers the findings and discussions and is titled as “Significant clauses of
back-to-back subcontracts” by explaining what certain effects and influences may occur
as a result of construction arrangements involving one or a group of owners, main
contractors and subcontractors in regard to some of the most common construction
issues. Such issues are numerous but are all derived from four main issues: conditional
payment clauses, liquidated damages, deadlines and dispute resolution mechanisms. This
chapter therefore discusses certain points for contract drafters to take into consideration
by way of incorporation.
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 18
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Chapter 4 is basically a continuation of Chapter 3 but concentrates on one matter: dispute
resolution mechanisms and their related influences between the project parties.
Chapter 5 provides the conclusion of the dissertation and the related recommendations
produced as a result of the findings and discussions of this research.
Research Methodology
The methodologies adopted in this research are qualitative and doctrinal; the research is
conducted by making reference to the commonly recognized construction practices under
both common and civil legal systems. The research’s major references are derived from
the FIDIC set of documents; however, certain references are also made to UK, UAE and
French laws and case laws in support of the findings and discussions, although legal
references are provided mostly for elaboration purposes.
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 19
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Chapter 2 – Literature Review
2.1 Introduction
The topic of this research is associated with a number of issues that have been previously
examined and discussed by many scholars and researches. Specifically, the questions of
this dissertation investigate: what options available in contractual or judicial practices
preserve the rights of one party or another, how subcontracts and adopted contract
policies affect and influence the overall construction arrangement, and what mechanisms
in contracts should be considered by the construction parties when drafting such
interlocking documents.
This literature review, in association with the questions explored in this research,
examines the proposed idea of having some sort of collaboration in contractual
documents between the parties: in other words, having interlocking sets of documents
governing the relationships between main contractors, subcontractors and project owners.
This review is necessary to examine further the notions of back-to-back contracts, the
incorporation of contract terms and how privity rules affect the aforementioned issues.
2.2 What Is a Construction Contract?
In the civil law systems of the UAE, Egypt, Syria, Iraq, Lebanon and several other
countries, a construction contract is defined as:
“A contract whereby one of the parties undertakes to make a thing or to carry out
work against a counter value undertaken to be provided by the other party” 1
1 UAE Civil Transaction Code, s. 872
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 20
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
In France, a construction arrangement is categorized as a type of hire agreement contract;
therefore, it is not seen as an independent type of contract as derived from the ancient
Roman rules, which divided hiring contracts into three main types: the hiring of people
for employment and services, the hiring of movable or immovable things, and the hiring
of works (such as construction works).2
The French Civil Code3 provides the following:
‘There are three main kinds of hiring of industry and services: (a) The hiring of
workers who enter the service of someone; (b) That of carriers, as well by land as
by water, who undertake to carry persons or goods; (c) That of architects,
contractors for work and technicians following research, estimates or contracts’.
While in the UK, a construction contract is defined as:
“An agreement for the carrying out of construction operations; arranging for the
carrying out of construction operations by others, whether under sub-contract to
him or otherwise; or providing his own labour, or the labour of others, for the
carrying out of construction operations... includes an agreement to do
architectural, design or surveying work or to provide advice on building,
engineering, interior or exterior decoration or on the laying-out of landscape” 4
2.3 Contractual Collaboration
HHJ Newey once described the extent of construction activities in the case of Emson
Eastern v EME Developments by stating:5
2 Abd al-Rāziq al-Sanhūrī, Illustration on Civil Law (Egypt 1964, Dar Alnahda Alarabiyah) V7 Pt 1 Ch 1, 6
3 Law No. 2004-164 of 2004, s. 1779
4 Housing Grants, Construction and Regeneration Act 1996, s. 104
5 (1991) 55 BLR 114, 125
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 21
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
“I think the most important background fact which I should keep in mind is that
building construction is not like the manufacture of goods in a factory. The size of
the project, site conditions, the use of many materials and the employment of
various kinds of operatives make it virtually impossible to achieve the same
degree of perfection that a manufacturer can. It must be a rare new building in
which every screw and every brush of paint is absolutely correct”
The skeleton of a construction activity is further reflected in construction contracts;
whether such contracts are main contracts, subcontracts or supply contracts, this will not
change the fact that such contracts may relate to only one big or small project. Therefore,
away from the standard legal doctrines regulating all such contracts, certain levels of
contractual collaboration, as proposed by many, should be considered. This will be
elaborated thoroughly in Chapter 3.
The attempt of project stakeholders to determine appropriate interlocking terms of two or
more contracts depends on the legal skill of contract drafting. Collaboration among a
group of contracts between main contractors and subcontractors would be considered
back-to-back contracts.
Back-to-back contracts may not necessarily be made between a main contractor and a
subcontractor but can involve multiple members of a single project when such members
prefer to have a unified set of documents. For instance, this is often found in large
multinational projects that may require the collaboration of multiple stakeholders of
different capabilities. In such instances, drafting back-to-back documents is said to be a
difficult task.6
6 P. Godwin & Others of Herbert Smith Freehills LLP ‘Back to Back Contracts’ (Lexology, April 2011)
<http://www.lexology.com/library/detail.aspx?g=d75e0cf3-eb8d-4ce5-b39a-13e7b9b4ec4e> 02/11/2014
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 22
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
It is said that the methodology chosen to procure a project affects the level of
collaboration between the project parties and the related agreement documents. This is
more apparent in the traditional form of construction procurement, where this method
serves the least levels of collaboration between main contractors and subcontractors.
Other forms, such as the ICE and JCT standard forms, are said to be adversarial in terms
of the level of collaboration, while the NEC and ECC forms work to serve cooperative
relationships between the parties.7
The topic of this research is seen in a number of references by many scholars; many of
these sources have touched particular points of discussion in the construction industry
when it comes to the influences generated by the terms of main contracts over sub-
contractual activities and vice versa. For example, some scholarly references have served
general literature, while others have provided detailed studies in terms of particular
issues, such as the impacts associated with back-to-back payments.8
The scholarly sources related to this topic depend very much on a doctrine that is
respected and recognized by both common and civil law systems: the doctrine of privity
of contracts, which is the rule that “a contract cannot confer rights nor impose obligations
arising under it on any person except the parties to it”. This rule is held in common law
systems in cases like Price v Easton9 and Tweddle v Atkinson,10 which were both directly
linked with the principle of consideration. In both cases, claimants sued parties that were
7 O. A. Akintan & R. Morledge ‘Improving the Collaboration between Main Contractors and
Subcontractors within Traditional Construction Procurement’ (2013) Journal of Construction Engineering,
Hindawi Publishing, 8-9 <http://downloads.hindawi.com/journals/jcen/2013/281236.pdf> 14/10/2014
8 See Mahmoud Fathi Bader ‘Impact of 'Back to Back' Payment Clause on the Cash Flow of Subcontractor
in the UAE’ (MSc Thesis, British University in Dubai, 2013) <http://bspace.buid.ac.ae/handle/1234/507>
12/10/2014
9 [1833] 110 ER 518
10 [1861] EWHC QB J57
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 23
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
strangers to a disputed agreement; both cases were rejected, setting the doctrine of
privity.
This doctrine is also recognized in civil law systems, such as in the UAE. It was
previously held by the Dubai Cassation Court,11 and it is provided under Article 252 of
the UAE Civil Transaction Code (CTC) that:12
“A contract may not impose an obligation upon a third party but it may vest a
right in him”
Furthermore, one of the most important scholarly sources written about the topic of this
dissertation is the guidance directives proposed by FIDIC as part of its Conditions of
Subcontract for Construction 2011.13 The FIDIC Conditions of Subcontract for
Construction 2011 provide standard terms for dealing with construction subcontract
arrangements, particularly those that are based on the Conditions of Contract for
Construction 199914 (FIDIC Red Book 1999). The FIDIC Conditions of Subcontract for
Construction 2011 also brought some practice guidance for practitioners, giving
alternative terms to some of the contract’s standard terms that are usually seen as
sensitive in construction relationships. For example, Clause 20 [Notices, Subcontractor’s
Claims and Disputes] of the FIDIC Conditions of Subcontract for Construction 2011
proposes some particular general terms in regard to a contractor’s claims and the
formation of the Dispute Adjudication Board (DAB). Alternatives to the standard terms
of Clause 20 are also proposed, although only on a trial basis, pending feedback from
FIDIC users. FIDIC’s alternative terms are discussed in more detail under Chapters 3 and
4.
11 (2009) Dubai Cassation 96/2009 CA
12 UAE Civil Transaction Code, Law No. 5-1985 amended by Law No. 1-1987
13 Conditions of Subcontract for Construction for Building and Engineering Works Designed by the
Employer, ISBN 978-2-88432-068-9, 1st Edition 2011
14 FIDIC Red Book 1st Edition 1999, ISBN 2-88432-022-9
Faculty of Business MSc Construction Law & Dispute Resolution (CLDR)
Student ID: 120004 24
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Many references do not seem to recognize the influence of subcontractors on most
projects, despite the fact that subcontractors usually participate in more than 50% of
projects and their contributions can reach up to 90% of the total project value.15 It has
further become a common practice in many parts of the world to have the main
contractors act only as managers of subcontractors; the outcomes of most projects
therefore rely majorly on subcontractors.16 However, despite such high percentages in
terms of a subcontractor’s influence over a project, such influences are still not seen as
major causes for delaying a project. This is observed as a result of numerous studies
indicating that – on an international level – there are up to 73 different common causes
for construction delays but only a few of them refer to the issue of collaboration of main
and subcontract documents.17
The matter of contract collaboration was cited in the Latham Report ‘Constructing the
Team’, as published by Sir Michael Latham in 1994. Sir Latham reported that:
“The most effective form of contract in modern conditions should include a
wholly interrelated package of documents which clearly defines the roles and
duties of all involved, and which is suitable for all types of project and for any
procurement route” 18
15 L. Yoke-Lian & Others, ‘Review of Subcontracting Practice in Construction Industry’ (August 2012)
Vol. 4, No. 4, 1, IACSIT International Journal of Engineering and Technology
<http://www.ijetch.org/papers/406-P013.pdf> 14/10/2014
16 A. K. W. Ng & A. D. F. Price ‘Assessing the Impact of Main Contractor’s Site Co-ordination on Sub-
Contractors’ Performance in Hong Kong’ (2005) Association of Researchers in Construction Management
<http://www.arcom.ac.uk/-docs/proceedings/ar2005-0191-0200_Ng_and_Price.pdf> 20/10/2014
17 See M. Sambasivan & Y. Wen Soon ‘Causes and Effects of Delays in Malaysian Construction Industry’
(2007) International Journal of Project Management, 517-526
<http://www.nosazimadares.ir/fanni/doclib7/causes%20and%20effects%20of%20delays%20in%20malaysi
an%20construction%20industry.pdf> 20/10/2014
18 Sir M. Latham, Constructing the Team (ISBN 0 11 752994 X, UK, HMSO, 1994) 37
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It was concluded in the Latham Report that interrelated documentation clearly defining
the roles of the parties and a complete family of interlocking contractual documents are
very much a requirement in the UK construction industry, therefore coming to the
conclusion that non-collaboration between project stakeholders would constitute
problems in the face of the construction industry.
Sir Latham’s report made reference to the payment procedures of the NEC form of
contract, which at the time used to provide long payment periods to subcontractors –
these could reach up to three months after the completion of their subcontract works. Sir
Latham recommended that related payment durations must be modified in collaboration
with clients, contractors and subcontractors, which should facilitate consent on a different
timescale acceptable to all parties as part of an effort to propose cohesive main and
subcontract documentations.
Shortly after the publication of the Latham Report, the Egan Report was published in
1998, containing the findings reported by the Construction Task Force set up by the UK’s
Deputy Prime Minister John Prescott and chaired by Sir John Egan. Similarly, it further
concluded and recommended that integrated processes and teams are necessary in the
construction industry and hence more-integrated project processes were advised. Sir
Egan’s approach, however, was founded more on the idea of ensuring the success of a
project as a whole and improving the relationships between all parties, rather than being
favourable to one or more members of a project, leading to the further development of the
culture of Partnering and other innovative procurement methods. In this regard, Egan’s
report stated:
“The most successful enterprises do not fragment their operations – they work
back from the customer's needs and focus on the product and the value it delivers
to the customer. The process and the production team are then integrated to
deliver value to the customer efficiently and eliminate waste in all its forms. The
Task Force has looked for this concept in construction and sees the industry
typically dealing with the project process as a series of sequential and largely
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
separate operations undertaken by individual designers, constructors and suppliers
who have no stake in the long term success of the product and no commitment to
it. Changing this culture is fundamental to increasing efficiency and quality in
construction” 19
Furthermore, some have highlighted the necessity for main contracts and subcontracts to
be drafted on a back-to-back basis in terms of obligations, rights and liabilities. One
example relates to the protection of a main contractor in events that give grounds for
subcontractors to demand time extensions; as such events may not actually be the same
events that give grounds for main contractors to submit similar demands to employers.
This can have a consequence in terms of the main contractor paying liquidated damages
to the employer, as well as paying the subcontractor any damages as a result of such
delays, on which such liquidated damages from one side may not be recoverable from the
subcontractor, leaving the main contractor responsible for paying more than one
liability.20
2.4 Back-to-Back Contracts
It is often seen that main contractors fall into a common drafting mistake when they
attempt to draft back-to-back contracts: they simply rename the titles of the parties in the
main agreement to those associated with a subcontract. In other examples, the main
contractor simply mentions in the sub-agreement that the terms of the main agreement are
applicable between it and the subcontractor. In some jurisdictions, such simple references
are not recognized by courts, as seen in the Scottish case of Watson Building Services Ltd
19 Sir J. Egan, Rethinking Construction (HMSO 1998) 13
20 Z. Spyrou of Pinsent Masons ‘Sub-contracting – Risks and Opportunities’ (8/10/2010) Construction Law
Journal, 21 8 Cons. Law 20.
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v Harrison,21 where the court refused to apply a condition laid out by the main contractor
for making simple references to the terms of the main contract clauses.
It is said that the method of forming a back-to-back agreement as observed in the Watson
dispute could be seen as attractive because it saves time and money, yet such an approach
can result in ambiguity and can limit the main contractor’s attempts to pass down risks to
the subcontractor.22
Based on the above, some writers have condemned making simple references to main
terms and conditions in a subcontract document because this approach may not
necessarily serve the idea of collaboration between main and subcontract documents, as
the scope of services under the main contract is usually different from that of a
subcontract. Also, this approach may have a direct impact when it comes to the various
notification periods that are found in standard agreements, such as the notification
periods required to serve an extension of time demand starting from the moment of
becoming aware of a related event. In many such instances, the main contractor may not
even be aware of such events, unless the subcontractor notifies the main contractor of
these events as per the subcontract. More importantly, if such notifications come from the
subcontractor on the very last date of the notification period, this may not give sufficient
time to the main contractor to make a similar notice to the employer, resulting in the
subcontractor having to make a claim against the main contractor long before the
employer or engineer can evaluate the extension request of the main contractor to the
employer. Therefore, a simple reference between contractual documents would not
achieve collaboration or compliance between the contractual documents. Instead,
appropriate drafting should be observed in order to achieve such interlocking aims.23
21 [2001] SLT 846
22 Spyrou (n 20) 13
23 Ibid 22
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Other writers have criticized the idea of back-to-back contracts because such contracts
create problems of interpretation and may not achieve the effect intended in terms of
project success or risk diversion as decided by main contractors and employers.24
Such mutual effects between main construction contracts and subcontracts may be
determined by the differences or similarities between the contracts, as they can be
majorly similar and in compliance with each other or they may well be completely
different from each other in terms of prices, terms and penalties. The general
understanding, however, is that certain levels of conformity should be provided between
main and subcontract documents in order to achieve a successful project result. This
notion has been pursued by construction industry professionals and has been recently
developed by international module contracts such as the FIDIC Conditions of
Subcontract for Construction 2011, PPC, SPC 2000 and the NEC 3 family of contracts.
2.5 Privity of Contracts
In order to achieve an appropriate level of contractual conformity when dealing with
interlocking sets of documents or back-to-back agreements, one major principle defines
and limits the drafting process and further highlights the necessity of drafting skill, which
is the principle of privity of contracts.
It is well established that a main construction contract is an agreement signed between the
employer and the main contractor, while a subcontract agreement is made between a
main contractor and their contractors. Under the general principles of common and civil
laws, the principle of privity would apply, and this principle is a well-established one in
the English common law system.25
24 J. Uff, Construction Law (ISBN 9781847037671, 10th Edition, Sweet & Maxwell 2009) Ch 10, 325
25 Dunlop Pneumatic Tyre Company Ltd v Selfridge & Co Ltd [1915] AC 847
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Sub-Clause 1.10 of the FIDIC Conditions of Subcontract for Construction 2011 provides:
“Nothing stated in the Subcontract shall be construed as creating any privity of
contract between the Subcontractor and the Employer”
FIDIC has proposed that the clause mentioned above should be observed when dealing
with FIDIC in different parts of the world because some laws impose joint liabilities and
obligations among main contractors and employers to pay the dues of a subcontractor,26
whereas the FIDIC guidance proposes that even though such statutory obligations exist,
they should still not be construed as establishing any privity of contract between a
subcontractor and an employer.
Subcontractors and employers in an ordinary construction project would normally not
have direct contractual relationships with each other; an employer usually appoints a
main contractor, and the main contractor then appoints its own single or multiple
subcontractors. Each subcontractor may be specialized in a particular field of a related
construction industry. This means that in any case of default or breach of agreement, the
employer would not be able to sue the subcontractor directly for defaults associated with
its performance, and equally the subcontractor would not be able to sue the employer for
payment of the subcontractor’s entitlement by the main contractor.27
The rules regulating construction arrangements in the UAE are generally provided in the
CTC, which provides the general principles and rules of a construction contract, as well
the rules of contracts in general. The law further covers subcontracting liability rules
under Article 890, which provides:
26 French Subcontracting Law No 75/1334, s 12
27 Nicholas Gould of Fenwick Elliott ‘Subcontracts’ (2011) 1
<http://www.fenwickelliott.com/files/nick_gould_-
_subcontracts_paper_for_university_of_vienna.indd_.pdf > 21/8/2014
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
“(1) The contractor may entrust the performance of all or part of the work to
another contractor unless a condition in the contract prohibits him from so doing,
or unless the nature of the work is such as to require him to do it in person.
(2) The liability of the first contractor shall remain in place as against the
employer”
From the above Article, it is clear that the liability of the subcontractor should rather be
treated as a liability of a main contractor towards the employer, and it can also be seen
that the law allows main contractors to appoint subcontractors without having to take
permission from the employer as a default rule, unless expressed otherwise under the
agreement or as per any surrounding circumstances prohibiting main contractors from
appointing subcontractors. This is contrary to the rules seen in the FIDIC modules, which
give the default rule that main contractors are not permitted to acquire assistance from
subcontractors, unless agreed otherwise.28
The CTC further determines the idea of privity between those involved in a subcontract
arrangement by prohibiting subcontractors from pursuing employers in regard to their
contractual rights by stating under Article 891 the following:
“The second contractor may not make any claim against the employer for
anything due to him from the first contractor unless he has made an assignment of
it to him as against the employer”
From the above, it is clear that the law by default separates the relationship between
employers and subcontractors. In other words, it separates the agreement between the
employer and the main contractor from one side and between the subcontractor and the
main contractor from the other side.
28 FIDIC Red Book 1999, s. 4.4
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2.5.1 Exceptions to Privity Rules
a) Named and Nominated Subcontractors
The CTC is a general law dealing with construction contracts; hence, a number of
questions are not explicitly answered under the CTC but are instead left to be dealt with
under the general principles of civil laws and Islamic sharia.29 For example, the CTC
provides rules under Article 891 in terms of safeguarding the rights and liabilities of the
construction employer against claims that may be raised by a subcontractor that is
unknown to the employer, and equally provides further rules as per Article 890 in terms
of safeguarding the rights and liabilities of a subcontractor against claims that may be
raised by an employer that is equally unknown to the subcontractor.
Despite the rules and principles previously described, the judicial practice in Dubai holds
some exceptions to the privity rule. This is apparent when answering the question of who
appointed the subcontractor.
The Dubai Court of Cassation has held in a number of its judgments that mistakes,
damages or delays caused by a subcontractor that is appointed by the employer would be
the employer’s liability, not the main contractor’s.30
The rules set forth by the Dubai courts may not apply in situations where an employer or
project engineer under an agreement is not authorized to nominate or name
subcontractors but is only authorized to reject or approve subcontractors proposed by the
main contractor. The main contractor here may still be liable for the works of his
subcontractors, even if they were approved by the employer or engineer yet originally
proposed by the main contractor. A practical example of such a situation can be found in
29 UAE Civil Transaction Code, s. 1
30 (2008) Dubai Cassation 213/2008 & (2008) Dubai Cassation 266/2008
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Clause 4.4(b) of the FIDIC Red and Yellow31 Books 1999, as they differentiate between
subcontractors that are named or nominated from those that are domestically appointed
by the main contractor, even if they are approved by the employer or engineer first.
In terms of the liability of contractors for performance violations committed by
subcontractors that are nominated by the employer, Section 5.2 of the FIDIC Red Book
1999 provides that the main contractor can object to a nomination of a subcontractor as
long as the proposed subcontractor does not specify levels of indemnity in favour of the
main contractor against any defected performance executed by the nominated
subcontractor. The same right is given if the subcontracted works do not transfer the risk
of defected performance from the main contractor to a nominated subcontractor. The
objection situations described in Clause 5.2 of the FIDIC Red Book 1999 further suggest
that a main contractor may still be liable towards the employer for the performance of a
nominated subcontractor if the subcontract does not specify an indemnity clause against
the liability of the main contractor.
FIDIC Clause 5.2 remains impractical in the eyes of UAE law, as previously described,
whether the subcontract provides an indemnity clause in favour of the main contractor or
not, as long as the main contractor is deemed to have previously had a chance to object to
a certain nomination made by an employer. The reason for this rule refers back to Article
890(2) of the CTC, which provides for a strict liability against main contractors for the
performance of their subcontractors, as even the previously described Dubai judicial
precedents (which ruled that a main contractor shall not be held liable for the works of
subcontractors named or nominated by the employer) have made the exception that a
main contractor should not have been given ‘any chance’ to approve or reject a particular
nomination as per the merits specified in these precedents. The example of FIDIC
contracts seems to have given the main contractor such a clear chance.
31 FIDIC Conditions of Contract for Plant and Design-Build – 1st Edition, 1999
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As for the nature of the relationship between a nominated subcontractor and the
employer, this has not been expressed as a direct contractual relationship. The precedents
issued by the Dubai courts referred to earlier seem to have been issued only on the basis
of causation.32
English law strictly respected the privity rules and had no exceptions to the liability of the
main contractor for the performance of a nominated subcontractor, at least not until the
case of Bickerton v. NW Hospital Board,33 which gave an exception in situations where a
nominated subcontractor deliberately repudiates the contract. However, still, as a general
rule, an employer does not share responsibility as a result of defects or delays committed
or caused by a nominated subcontractor. This is said to have caused significant changes
in UK standard forms of contract, such as JCT forms,34 giving contractors the right to an
extension of time for delays caused by the nominated specialist subcontractor or giving
the right for reasonable objection to a nominated subcontractor.35 These changes,
however, are said to deprive the employer from remedy, save under any direct warranty.36
In the mentioned Bickerton case, it was held by the court that the employer would have a
duty to re-nominate and pay for a new specialist subcontractor’s account should the old
one deliberately repudiate the contract. Yet interestingly, in the case of Gloucestershire
County Council v. Richardson,37 which refers to the matter of nominated suppliers, the
main contractor found defects in pre-cast concrete columns supplied by a nominated
32 Professor A. Masadeh ‘Vicarious Performance and Privity in Construction Contracts’ (2014)
International Construction Law Review, v 31, 108
33 [1970] 1 WLR 607
34 1963 Edition, cl.23(g); JCT 80, cl.25.3.7
35 J. Adriaanse, Construction Contract Law (UK ISBN 978-0-230-23044-6, 3rd Edition, Palgrave
Macmillan 2010) 252
36 Uff (n 24) 329
37 [1969] 1 A.C. 480
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
supplier; the form of contract applied was RIBA 1939, which did not allow contractors to
object to the choice of nominated supply contracts. It was held by the court that the main
contractor would not be held liable for the defective supply and was therefore not in
breach of contract.
b) Collateral Warranties
Another exception to the contracts privity rules is found when establishing collateral
warranties. A collateral warranty is a warranty given by a subcontractor directly to the
employer undertaking to warrant the quality of goods or works.
In the leading case of Shanklin Pier Limited v Detel Products Ltd,38 the claimant owned a
pier that required maintenance and repainting. Detel Products (the paint supplier and
subcontractor) warranted to the claimant that its products were suitable for the pier and
further warranted that their paints would also ensure rust protection for a period of ten
years. Shanklin (the employer) therefore trusted this warranty and appointed a main
contractor to do the painting. The paint later failed to serve the requirements of the
claimant, hence the claimant claimed for damages directly from the subcontractor (the
defendant) and not from the main contractor because the warranty had not been issued by
the main contractor and the main contractor did not actually make any comments on such
warranties. This was despite the fact that the agreement for the purchase of the paint had
been made between the main contractor and the subcontractor.
The judgment made by McNair J’s reads:
“This case raises an interesting and comparatively novel question whether or not
an enforceable warranty can arise as between parties other than parties to the main
contract or the sale of the article in respect of which the warranty is alleged to
have been given... I am satisfied that, if a direct contract of purchase and sale of
38 [1951] 2 KB 854
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
[the paint] had then been made between the plaintiffs and the defendants, the
correct conclusion on the facts would have been that the defendants gave to the
plaintiffs the warranties substantially in the form alleged in the statement of
claim. In reaching this conclusion, I adopt the principles stated by Holt CJ in
Crosse v Gardner and Medina v Staughton that an affirmation at the time of sale
is a warranty provided it appear on evidence to have been so intended”
If, as is elementary, the consideration for the warranty in the usual case is the
entering into of the main contract in relation to which the warranty is given, I see
no reason why there may not be an enforceable warranty between A and B
supported by the consideration that B should cause C to enter into a contract with
A or that B should do some other act for the benefit of A.’
Collateral warranties are also permissible and enforceable under UAE law, based on the
general principles of contracts and insurance.
c) Direct Payment
Employer–subcontractor direct payment arrangements are not impliedly nor explicitly
provided in UAE law. This arrangement is not recognized due to the privity of contracts
rules. However, some standard forms of contract have provided direct payment
arrangements in relation to nominated subcontractors but not as a first choice
arrangement. By way of example, Clause 35.13 of JCT98, Clause 59(7) of ICE and
Clause 5.4 [Evidence for Payment] of the FIDIC Red Book 1999 explain that an
employer may request reasonable evidence from the main contractor that payment has
been made to a nominated subcontractor under the contract and that this would be a
requirement before a payment certificate can be issued to the main contractor.
It is said by some that such an undertaking is unnecessary, but others have argued that it
will surely serve the interest of the employer in situations where the main contractor
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becomes bankrupt, as the employer here will continue paying the specialized
subcontractor in order to ensure continuation of the work pending the substitution of a
general contractor, therefore reducing delays and damages. Greater delays and damages
could be expected as a result of having specialized subcontractors suspend works due to
the insolvency of the main contractor.39
In 1975, France introduced new laws designed to protect the rights of subcontractors, as
well as a law that establishes direct payment obligations between employers and
subcontractors under certain conditions.40 The law provides that main contractors are
under obligation to issue bank guarantees in favour of their subcontractors, guaranteeing
payment for executing the subcontract works. Equally, employers are under obligation to
ensure that their main contractors comply with this requirement, and failure by the
employer to ensure these requirements would give the subcontractor the right to make a
direct claim to both the employer and the main contractor jointly. The French Supreme
Court recently extended the authority of these rules by considering them as part of the
French public policy, even if the main contract or subcontract utilised laws other than
French laws, as long as the works of such contracts or subcontracts are executed in
France.41
d) Payment Guarantees
Due to the lack of a direct contractual relationship between an employer and a
subcontractor, and as explained, a subcontractor may not make a direct claim to the
employer for payment, and an employer could by virtue of contract have the option to
deduct some of the entitlements of the main contractor in favour of the subcontractor if
39 Gould (n 27) 25
40 Law No. 75-1334 issued on 31 December 1975
41 (2007) French Court of Cassation, 06-14006
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the main contractor fails to present evidence of payment. However, whether or not such
options are available to the parties, the subcontractor may still request a guarantee from
the employer ensuring such direct payment arrangements.
In UAE law, there are no special forms to conduct such guarantees, since a guarantee is
considered an agreement establishing certain obligations upon a guarantor; however, in
accordance with the UAE judicial system and practice, it is in the best interests of
subcontractors to insist that such guarantees are established in writing.
In the UK, such guarantee agreements must be in writing to be recognized as valid
guarantees. This was further confirmed in the case of Actionstrength Ltd v International
Glass Engineering IN.GL EN Spa,42 where it was decided that a verbal guarantee cannot
be enforced for the reason that it does not comply with Section 4 of the Statute of Frauds
1677.
e) Statutory Exceptions
Some laws provide exceptions to the privity rules, such as the UK’s Contracts (Rights of
Third Parties) Act 1999, which rather regulates the exceptions that are already established
under common law principles. It further stipulates that:
“A third party may enforce contract terms if it expressly states that the third party
may enforce the term, or if the term purports to enforce a benefit on that third
party”
Other laws have also been introduced providing certain exceptions to the rules of privity,
such as the UK’s Road Traffic Act 1988 and the UAE’s Traffic Act 1995. Both laws
confer rights to third parties to benefit from the comprehensive compulsory vehicle
42 [2003] BLR 207
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insurance requirements; however, similar arrangements are often seen as being hybrid
arrangements containing both elements of laws and contracts.
2.6 Incorporation of Main Contract Terms in Subcontracts
In most examples, the aim of contract incorporation is to achieve a back-to-back
agreement. There are two methods of dealing with incorporation of terms in contracts:43
1- The first is by incorporating by reference all conditions of the main agreement
with exception to particular parts of the main agreement that are directly excluded
(these are usually confined to terms clearly not applicable to the subcontract, e.g.
terms associated with money). This approach is seen by contractors as an easy
way to conclude a back-to-back contract for the reason that this method is fast and
cost-effective, yet a contract drafted using this method should be carefully
observed because it may lead to disputes and difficulties.
2- The second approach is by drafting independent terms specifically tailored for the
subcontract.
In English law, the incorporation of terms means the inclusion of terms of one contract in
forming part of another contract. The English courts have judged many cases regarding
this issue, and the collective set of English precedents forms the rules that are required to
consider contract incorporation mechanisms as valid. These requirements can be
summarized as follows:
Sufficient notice of the incorporated terms should be provided before or
during the formation of the latter contract.
43 Godwin et al. (n 6) 1
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This was held in the case of Olley v Marlborough Court Hotel.44 The claimant
reserved accommodation in a hotel owned by the respondent. Inside the booked
room was a notification providing that the hotel would not be responsible for any
lost or stolen property unless the property was given to the administration to be
deposited in a safe box. The claimant had her fur jacket stolen from her room; she
later filed a case against the defendant claiming for damages. Due to the
reservation contract being formed at the reception of the hotel before the plaintiff
acquired the room, and as the notice of the term was made only after the making
of the agreement, it was held that the notice (which was visible only after the
room had been booked by the plaintiff) could not be considered an incorporated
term with the booking agreement.
The English courts have further given an exception to the requirement of notice if
any continuous past dealings took place between the parties. For instance, in
McCutcheon v. David MacBrayne Ltd,45 the court mentioned that the course of
past dealings must be ‘regular and consistent’; in Henry Kendall Ltd v. William
Lillico Ltd,46 it was ruled that a total of 100 similar agreements over a period of
three years was considered a ‘regular and consistent’ course of transaction. In
Hollier v. Rambler Motors (AMC) Ltd,47 it was held that a total of four
agreements over a period of five years was not considered a course of dealing.
The incorporated terms referred to must be found in a valid contract or a
contract that is intended to be binding.
44 [1949] 1 KB 532
45 [1964] 1 WLR 125
46 [1969] 2 AC 31
47 [1972] 2 QB 71
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In Chapelton v. Barry Urban District Council,48 the claimant rented a deckchair
from the defendant to use on the beach. The claimant was given two receipts that
stated on the back of each that the defendant would not be responsible for any
damages that may arise as a result of renting the chair. However, the chair was
defective; it collapsed and caused injuries to the claimant, who later filed a claim
against the defendant. In his defence, the defendant referred to the liability
exclusion terms found on the back of the receipts. The court ruled that the terms
found on the receipt could not release the defendant from liability for the reason
that the receipts were not documents expected to be treated as contractual terms.
That ‘reasonable steps’ as described by courts should be followed by the
party that requires the application of the incorporated term.
This was explained in the case of Parker v. South Eastern Railway Company,49
where the court held that it is not important for a party to read the incorporated
term; however, a party should take ‘reasonable steps’ to bring the incorporated
term to the attention of the other party. The case of Thompson v. London, Midland
and Scottish Railway Co Ltd50 illustrates this further where the claimant bought a
train ticket that stated ‘see back’ on its front. The back stated that full terms and
conditions could be found on the company timetables. The court ruled that the
term was valid because ‘reasonable steps’ had been taken to bring it to the
claimant’s awareness, even though the claimant proved to be illiterate.
The case of J Spurling Ltd v. Bradshaw51 established what is known as the ‘red
hand rule’, which Lord Denning describes as follows:
48 [1940] 1 KB 532
49 [1877] 2 CPD 416
50 [1930] 1 KB 41
51 [1956] 1 WLR 461
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“I quite agree that the more unreasonable a clause is, the greater the notice
which must be given of it. Some clauses which I have seen would need to
be printed in red ink on the face of the document with a red hand pointing
to it before the notice could be held to be sufficient”
2.6.1 Incorporation by Reference
Incorporation of reference or by reference is different from incorporation of terms. The
first is more common in construction subcontracts, while the second means that a certain
contract is referred to in another contract as being applicable alongside the first contract.
If this is done properly, then the entire contract which is referred to would form part of
the contract which made the reference.
Incorporation by reference can also be applied when the parties of a main construction
contract make reference to an international standard contract, such as the FIDIC
contracts. When incorporation by reference becomes necessary, then the text to be
adopted must be clear in showing that the parties meant to incorporate the particular
document (e.g. “The following documents shall be deemed to form and be read and
construed as part of the contract…” ).52
2.6.2 Incorporation of Terms in UAE Law
In the UAE, most of the examples found relate to arbitration clauses that were written in
other agreements involving the same parties of a particular dispute. The examples taken
from UAE law will therefore be examined on an analogical basis.
52 Dennis Brand ‘Incorporation of Reference’ Construction Week Online (2010) 1,
<http://www.constructionweekonline.com/article-9592-incorporation-of-reference/1/print/> 30/10/2014
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
On the matter of making agreements by way of reference, the judgments of the UAE
courts have been quite varied. For instance, it was once decided that an arbitration
agreement is deemed to be concluded if the parties under a construction contract intended
to have a FIDIC standard agreement be treated as complementary to their particular
construction contract.53
In another example, an opposite ruling was decided in regard to making general reference
to another contract containing an arbitration clause. It was held that it is not sufficient to
establish an arbitration agreement if the particular arbitration term of that other contract is
not explicitly referred to.54 However, it has recently been confirmed by a Dubai Cassation
Court ruling that a reference to an arbitration term can be made even if the arbitration
clause is written on a non-contractual document, such as a bill of lading.55
On the other hand, UAE law indicates that incorporation of terms and incorporation by
reference are permissible as per Article 132 of the CTC, which provides the following:
“An expression of intention may be made orally or in writing, and may be
expressed in the past or present tense or in the imperative if the present time is
intended or by an indication as is customary even if made by a person who is not
speechless, or by an interchange of acts demonstrating the mutual consent or by
adopting any other course in respect of which the circumstances leave no doubt
that they demonstrate mutual consent”
53 (2002) Dubai Cassation 462/2002
54 (2005) Dubai Cassation 174/2005
55 R. Karrar-Lewsley & Z. Anani ‘Dubai Court of Cassation Judgment: Incorporation of Arbitral Clause by
Reference in Bill of Lading’ Al Tamimi & Co (November 2013) 1,
<http://www.tamimi.com/en/magazine/law-update/section-5/november-4/dubai-court-of-cassation-
judgment-incorporation-of-arbitral-clause-by-reference-in-bill-of-lading.html#sthash.VcngqK9z.dpuf>
2/11/2014
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Chapter 3 – Significant clauses of back-to-back subcontracts
Introduction
Special consideration needs to be given to the drafting and tendering process of a
construction project, especially when drafting a back-to-back agreement. This
consideration is mostly associated with the following issues:56
1- Conditional payment clauses
2- Liquidated damages
3- Deadlines
4- Dispute resolution
This dissertation examines and discusses the above issues alongside additional matters
that are derived from these general issues. Furthermore, this discussion clarifies the
different influences that may be enforced between project parties and contract documents
as a result of the choices adopted upon having agreed on particular contractual terms,
arrangements and procurement mechanisms.
3.1 Terms of Payment
It is preferable to have the main construction agreement harmonized with its subcontract
in order to avoid risks of contradicting terms between different construction parties
within the same construction project.
56 Godwin et al. (n6) 2.
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
For example, when the employer demands to establish direct performance liability on the
subcontractor, the subcontractor should equally demand that the employer be directly
responsible for any claims of payment that may fail to be honoured by the main
contractor. However, all such requirements are down to the skilful drafting abilities of the
parties, which should not accidentally establish a direct contractual relationship between
the employer and a subcontractor.
Clause 5.4 [Evidence of Payment] of the FIDIC Red Book 1999 provides for a proactive
approach to be applied by the engineer in order to ensure that a nominated subcontractor
is being paid. These measures are observed in the FIDIC Red Book standard rules
requiring the main contractor to submit evidence of payment of the wages of the
nominated subcontractor. The rules go further by giving the employer the authority to pay
the nominated subcontractor directly should the main contractor fail to provide evidence
proving the payment to the nominated subcontractor.
These FIDIC direct terms apply in relation to nominated subcontractors only, and they do
not apply to subcontractors that are domestically appointed by the main contractor. The
reason is because the employer is deemed to share a level of responsibility towards the
rights of the subcontractor and would equally further share a level of liability towards the
subcontractor’s own performance liabilities only because such a subcontractor is in fact
nominated or desired by the employer. By contrast, domestic subcontractors are not
associated in any way with the employer’s choices and desires.
UAE law adopts a slightly different approach from what is presented under the FIDIC
contracts in terms of rights and liabilities regarding payments between employers and
subcontractors. These differences can be summarized as follows:
a) Clauses 5.3 and 5.4 of the FIDIC Red Book 1999 make it an obligation of the
engineer and employer to ensure payment to a nominated subcontractor by the
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
main contractor or directly by the employer upon making the necessary
deductions from the dues of the main contractor.
b) While Article 891 of the UAE CTC prohibits subcontractors – whether named,
domestic or nominated – from making any payment claims against employers, an
exception to this rule is where the main contractor refers the subcontractor to the
employer for payment.57 It is presumed that this implies that the referral will mean
that the subcontractor can be paid only by deducting from the pending dues of the
main contractor where such dues are recognized by the employer at the time. This
is because if the main contractor is not entitled to payments from the employer,
then the rule laid out by UAE law may not be applicable.
It is worth mentioning that direct reference of incorporating the main contract terms
within the subcontract terms often causes problems.58 For instance, in the case of Geary,
Walker & Co. Ltd v. W Lawrence & Son,59 the parties agreed on similar terms of payment
between the main contract and the subcontract, yet the value of retention under the main
contract exceeded the amount payable to the subcontractor under the subcontract. The
court held that the conditions of the main contract in regard to the payment terms were
applicable, and the same was held in regard to the retention money. However, the court
decided that payment should be made in the same proportion as the proportion of the
subcontract amount to the main contract amount.
Clause 14.7 [Payment of Retention Money under the Subcontract] of the FIDIC
Conditions of Subcontract for Construction 2011 seems to give a rule complying with the
ruling in the Walker case. The guidelines also provide that the main contractor should pay
to the subcontractor the retention money of the subcontract in the same portion that
57 (2001) Dubai Cassation 405/2001 and (2001) Dubai Cassation 428/2001
58 Gould (n 27) 7
59 (1986) HBC (4th Edition) Vol 2, Page 382 CA
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
applies to the retention money provided under the main contract (Clause 14.9 [Payment
of Retention Money]).
By contrast, in UAE law, it is permissible for two parties to make reference to the terms
regulating their relationship by pointing to terms described in another contract signed
between other different parties, as long as the first parties are aware of the terms that are
mentioned in the other contract. This is indicated in Article 132 of the UAE CTC. UAE
law furthermore acknowledges making reference to the main construction terms and
conditions under the subcontract. This can be seen in a number of cases concerning back-
to-back terms that have been judged by the Dubai Cassation Court.60
3.2 Terms of Back-to-Back Payment Arrangements
Back-to-back payment conditions (or pay when paid / pay when certified conditions) are
conditions whereby a subcontractor accepts the risk of being paid by the main contractor
only if the employer pays the main contractor or if the employer certifies payment to the
main contractor.
Originally, the reason for back-to-back payment terms being considered in the
construction field was to release the main contractor from the liability of making payment
to the subcontractor until it had been first paid by the owner of the project. The effect of
these terms was to allow the main contractor to transfer related payment risks to its
subcontractors down the construction chain.
UAE judicial practice has established the rule that pay when paid and pay when certified
clauses are valid, permissible and enforceable conditions61 and that a subcontractor would
not be entitled to payment unless the main contractor is paid or certified for payment first,
60 (2007) Dubai Cassation 240/2006
61 ibid
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
whenever there are such agreements between the parties. The legal basis applied in the
UAE refers to Articles 420 and 422 of the CTC, which states:
“a Condition is a future matter where the existence of a consequence or its non-
existence depends upon the materialization of the Condition”
and:
“a suspended transaction is one that is restricted in an unfulfilled Condition or a
future event and is one where its effects differ pending the formation of the
Condition”
Back-to-back payment terms do contain some negative effects. The UK construction
industry in particular has a long history of fighting such terms and describing them as
unfair. The UK has suffered the negative consequences of such terms, especially in the
1980s and 1990s. As a consequence, these terms are now prohibited under Section 113 of
the Housing Grants, Construction and Regeneration Act 1996, which provides that:
“A provision making payment under a construction contract conditional on the
payer receiving payment from a third person is ineffective, unless that third
person or any other person payment by whom is under the contract (directly or
indirectly) a condition of payment by that third person, is insolvent”
It is not advisable for subcontractors to accept back-to-back payment terms because they
contain a high risk of the subcontractor not being paid if a main contractor is not paid for
any reason. A subcontractor should attempt to negotiate the removal of back-to-back
payment terms under a proposed agreement. If this is not possible, then such back-to-
back payment terms should at least be modified to become more feasible or to contain
special exceptions. For example, a subcontractor could accept back-to-back payment
terms under the following exceptions:
a) Where the main contractor was not the cause of the employer or engineer refusing
to pay or certify payment to the main contractor. Examples of this situation are
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
when a main contractor breaches its obligations towards the employer and the
subcontractor had no association with the breach.
b) Where the employer was refusing payment to the main contractor for no apparent
reason, such as if there were no legitimate force majeure events preventing the
employer from making payment to the main contractor.
The above proposals are considered in line with the UAE’s public policy, which aims to
apply the idea that contracts ought to be performed in good faith. In this regard, Article
246 of the UAE CTC provides that:
“a) The contract must be performed in accordance with its contents and in a
manner consistent with the requirements of good faith.
b) The contract shall not be restricted to an obligation upon the contracting
party to do that which is [expressly] contained in it but shall also embrace that
which is appurtenant to it by virtue of the law, custom and the nature of the
disposition”
Under the aforementioned drafting proposals, the typical back-to-back payment terms
under UAE law and practice may not be applicable. Here, the subcontractor in both
examples may claim from the main contractor all its entitled dues, even with the presence
of a conditional back-to-back payment term. Considering the second proposal in
particular, the subcontractor may insist on another associated condition based on Article
891 of the UAE CTC, which provides that a subcontractor shall not make direct claims
against the employer unless the main contractor referred the subcontractor to the
employer for payment. Therefore, it would additionally be preferable for a subcontractor
to implement a condition in the subcontract allowing it to pursue the employer directly
for its dues.
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
3.3 Terms of Variations and Related Claims
In FIDIC contracts, variations can be any alterations to permanent or temporary works.
Variations may therefore include changes in quantities, standards, types, details, ordering
and lengths of any works.62 By contrast, under UAE law, the scope is limited to
permanent works.63
Because projects depend on the objectives of the employers in terms of time, quality and
costs, the instructions of variation orders could lead to many changes in construction
periods and other related costs.64
An employer’s variation in works may lead to the main contractor applying or requesting
consequential variations from its subcontractors, turning such subcontractors into
claimants towards a particular variation introduced under the main contract. Generally,
the same liability principles would apply in terms of claims that originate from the main
works.
Clause 13 of the FIDIC Red Book 1999 states the rules of variations [Variations and
Adjustments]. However, complications may arise if the main construction agreement
does not comply with the subcontract in terms of the methods used in pricing. This is
seen more often when one of the contracts is a value-measured contract and the other is a
lump-sum price agreement. In other words, the relationship between the employer and the
main contractor may be based on a measured construction agreement, such as the FIDIC
Red Book 1999, while the relationship between the main contractor and the subcontractor
62 Adriaanse (n 35) 205
63 CTC s. 887 (2)
64 O. A. Sunday ‘Impact of Variation Orders on Public Construction Projects’ Association of Researchers
in Construction Management 26th Annual ARCOM Conference (2010) 101 <www.arcom.ac.uk/-
docs/proceedings/ar2010-0101-0110_Sunday.pdf> 20/4/2013>
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
could be based on a subcontract with a lump-sum payment arrangement, similar to the
FIDIC Yellow Book 1999. In such instances, it is easier for the main contractor to agree
with the employer on the values of variations, of which such values should be pre-
determined under the main contract. Such agreement is not easy to reach under the
subcontract in the given example for the reason that a variation in a lump-sum agreement
would require the explicit consent of both parties before any changes could be applied.
These are the rules in UAE law as well.
The legal basis of the above UAE rules can be traced back to Articles 886 and 887 of the
CTC, which consecutively provide:
‘886
“(1) If the contract has been made for a measured quantity on a per-unit basis and
it appears during the work that it is necessary for the implementation of the agreed
plan to exceed the estimated quantity by a significant amount, the contractor must
immediately notify the employer thereof, stating the amount by which he expects
the price to be increased. If he does not do so, he shall lose his right to recover the
excess costs over the value of the measured quantity.
(2) If there is a gross excess in the quantity required to implement the plan, the
employer shall be entitled to withdraw from the contract and to suspend the
execution, but he must do so without delay and must pay the contractor the value
of the works that he has completed, assessed in accordance with the conditions of
the contract”
887
“(1) If a contract of muqawala65 has been made on the basis of an agreed plan
against payment of a lump sum, the contractor may not require any increase in the
payment required for the implementation of the plan.
65 A construction contract
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
(2) If there is any variation or addition to the plan with the consent of the
employer, the agreement with the contractor shall be observed in connection with
such variation or increase”
The FIDIC Conditions of Subcontract for Construction 2011 were issued in an attempt to
harmonize the relationship between the FIDIC Red Book 1999 (in terms of the main
construction works) and subcontracts. The FIDIC Conditions of Subcontract for
Construction 2011 provide multiple hypothetical examples in its Guidance Chapter for
the “Preparation of Particular Conditions of Subcontract” for most of its clauses. For
instance, under the guidance associated with Clause 12 [Measurement and Evaluation],
three possible scenarios are given on how the measurement relationship could be
arranged between a main contractor and a subcontractor. The first scenario is applicable
if the parties of a subcontract have agreed that the subcontractor would not take part in
the measurement of the sub-contract works – not by actual measurement nor by records.
The second scenario is where a subcontractor would not take part in the measurement of
the subcontract works but would be permitted to participate wherever the subcontract
works are going to be measured by records. The third scenario is where the manner of
measurement of the sub-contract works is not going to be applied under the main contract
In an attempt to avoid discrepancies between main and subcontract documents, the FIDIC
Conditions of Subcontract for Construction 2011 furthermore advise (in Clause 14.1
[Subcontract Price]) that choosing a lump-sum type of subcontract may be suitable if:
(a) Tender documents contain sufficient information that is seen as complete for
construction and for subcontract changes to be unexpected; and/or
(b) If the main agreement is also a lump-sum contract.
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
3.4 Terms of Performance Security
Under the FIDIC Red Book 1999, the terms regarding performance security are stated in
Clause 4.2 [Performance Security]. These terms are designed to ensure the proper
performance of the main contractor’s works towards its employer in regard to the
permanent and temporary works of the project. Performance security is also a common
arrangement applied in most construction contracts, whether they are based on FIDIC
contracts or not. Such security should be valid during the construction period until the
performance certificate is issued by the employer or engineer to the main contractor.
Under a subcontract arrangement, subcontract performance security may also be required
between the main contractor and a subcontractor; it is presumed that such subcontract
performance security should be valid during the whole period of the subcontract works
and until the performance certificate under the main contract is issued.
The FIDIC Conditions of Subcontract for Construction 2011 propose that performance
certificates of both the main works and the subcontract works should be issued on the
same date if the difference in the completion dates between the main contract and the
subcontract is not substantial. However, if the difference between such completion dates
is substantial, then the subcontract performance security obligation may end at a date
earlier than the date set or expected in the main contract.
Based on the above, it appears that the FIDIC conditions do not cover all the scenarios
that may apply in situations where the difference between the completion date of a
subcontract is substantially distant from the completion date of a main contract. It is clear
that conflicting interests between the rights of a subcontractor, a main contractor and an
employer are present, and the question remains as to the status of the performance
security of a subcontract obligation when the completion dates are distant from each
other. The FIDIC conditions appear to approach a policy that is more in favour of a
subcontractor, and this may have already been established in the line of natural justice.
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
One possible proposal for a compromise solution is to have the main contractor issue the
performance certificate to the subcontractor at a middle time falling between the
completion date of subcontract works and the agreed completion date of the main
contract works. This proposal, however, may not be seen as practical because the rights
of a subcontractor in terms of the entitlement of the performance certificate are quite
distant from the equivalent rights of a main contractor. Hence, one right could not be
compromised at the price of the other. This may be the reason why the FIDIC conditions
provide no guidance on this matter.
3.5 Terms of Programmes and Extensions of Time
It is clear that a main construction contract certainly affects a subcontract in terms of time
for completion and vice versa. It is further a standard rule that the date set and agreed for
subcontractors to complete their works should not exceed the agreed date for completing
the whole works of the main contract, otherwise delay damages may be incurred by the
main contractor as per standard forms of agreements.
It is understood that damages caused should be compensated by the person causing them;
this applies to both tortious damages and damages appearing as a result of performing or
non-performing a contract. Examples of such damages include situations where the
subcontractor fails to complete the works within the agreed time for completion, causing
the main contractor to incur delay or liquidated damages on its part under the main
construction contract.
The FIDIC Conditions of Subcontract for Construction 2011 provide under Clause 8.7
[Subcontract Damages for Delay] that the main contractor should be entitled to deduct all
damages incurred as a result of the subcontractor breaching Clause 8.2 of the conditions,
which led the main contractor to default on its part against Sub-Clause 8.7 [Time for
Completion] of the FIDIC Red Book 1999.
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
Furthermore, the FIDIC Conditions of Subcontract for Construction 2011 require that the
subcontractor’s programme fully comply with the programme and reporting requirements
of the main contract, as well as with Part A of Annex F of the contract, which sets the
general acceptable standards for the subcontract programme.
Any delay in the subcontract programme by the subcontractor will cause further delays in
the works of the main contract. Here, the main contractor should instruct the
subcontractor to submit a revised programme to expedite the subcontract works by
increasing working hours and/or increasing the number of personnel. The main contractor
may furthermore deduct any costs incurred as a result of the revised programme.
In this sense, it was decided in the English case of Martin Grant & Co Limited v. Sir
Lindsay Parkinson & Co Limited66 that where the main contract programme is extended,
this should lead to the automatic extension of the programme period of the subcontract.
3.6 Terms of Defects Notification Period
Sub-Clause 11.2 of the FIDIC Conditions of Subcontract for Construction 2011 warns the
following:
“…if the Subcontract Works are to be taken-over by the Contractor before the
Main Works are taken-over by the Employer in accordance with Sub-Clause 10.3
[Taking-Over by the Contractor] of the General Conditions, by virtue of this Sub-
Clause the Subcontract Defects Notification Period may be significantly longer
than the Defects Notification Period under the Main Contract”
Generally, the FIDIC subcontract terms seem to put more liability on the subcontractor
for keeping it on a longer period of liability in terms of the defects notification period.
66 (1984) 29 BLR 31
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
This has reference to Clause 11.2 itself, which specifies that the subcontract defects
notification period would start:
“from the date on which the whole of the Subcontract works have been taken-over
under Clause 10 [Completion of and Taking-Over the Subcontract Works] to the
date of expiry of the Defects Notification Period applicable to the Main Works or
Section or part of the Main Works of which the whole of the Subcontract Works
are part”
It is noted that the FIDIC guidelines take an approach that is not similar to the policies
adopted regarding performance securities, but the FIDIC guidelines do reduce the
liability of the subcontractor for expiring these securities starting from the date of
completing the subcontract works, as long as the completion date is substantially distant
from the one determined for the main construction works. However, regarding the defects
notification period, the liability of the subcontractor is viewed as extended from what was
originally intended.
The reasoning of FIDIC for the above may be related to reducing the liability of the
subcontractor under the performance security scheme because the works of the
subcontractor would then be deemed as fully performed ‘as a matter of fact’. Hence, any
latent defects would not be relevant to discharge the liability of the subcontractor at the
time when the terms of performance security come to an end.
3.7 Terms of Performance Certificates
Under standard FIDIC contracts, the performance certificate is dependent on the date
when the defects liability period comes to an end. The general rule requires that the date
when a subcontractor becomes entitled to the performance certificate should be the same
as when the main contractor is granted its performance certificate. However,
complications may arise when a subcontractor’s date of completion of the work is
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
considerably earlier than the main contractor’s date of completing the works. Here, it
may not be appropriate to have the subcontractor incur unreasonably longer defects
liability periods, which cause an unjustified delay in entitlement to the performance
certificate under the FIDIC contract.
Despite the above general approaches, the FIDIC Conditions of Subcontract for
Construction 2011 provide further guidance in this regard in Clause 11.3:
“If the date corresponding to the Subcontract Time for Completion is
considerably earlier than the date corresponding to the Time for Completion
under the Main Contract, such that it is not appropriate that the Subcontractor’s
obligations continue until the Contractor has fulfilled all his obligations under the
Main Contract, then this Sub-Clause may be varied”
3.8 Terms of Decennial Liability
The origins of the decennial liability statutory rule can be traced back to the French legal
system. It is a statutory guarantee that secures the liability of both the contractor and the
designing engineer for a period of ten years against any total or partial collapse of the
constructed structure or the structural integrity of the project. This sort of guarantee is
designed for the benefit of the owner and is provided under Article 880 of the UAE
CTC.67
The rules of decennial liability were brought into French civil law as early as 1804. The
French jurisprudence suggests that decennial liability is not a contractual or tortious
67 Decennial liability is also provided under Article 26 of Law No. 27/2007 Concerning Ownership of
Jointly Owned Properties in the Emirate of Dubai
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liability but rather a special rule that is not based on the general principles of laws and
cannot be expanded or compared within the context of the principles of legal analogy.68
Under the general principles, decennial liability is a legal guarantee against a contractual
violation caused by contractors and engineers, and it is aimed only in favour of the
employer that is part of the main construction agreement. This type of security may
therefore not be passed to third parties, such as subsequent purchasers of a building.69
In Egyptian law and jurisprudence, the idea of decennial liability is seen as a right in rem
that cannot be separated from the structure and would therefore be transferable with it to
the benefit of other subsequent purchasers of the building, allowing them to benefit from
the guarantee.70
In UAE law, there is no decennial liability between the main contractor and a
subcontractor. In accordance with Article 880 of the CTC, decennial liability applies only
between the project employer, its direct contractors and the designing engineers and may
not apply to other people that are not parties to a traditional construction contract.71
Because the decennial liability guarantee does not apply between main contractors and
subcontractors, this makes it necessary to have some sort of contractual guarantee (rather
than a statutory one) between the main contractor and its subcontractor for defective
subcontract works that may affect the overall integrity of the building during a main
decennial liability period.
68 Maurice 1940 in Civil Liability of Sub-Contractors in Civil Law (Comparative Study), R. Hammad
(Egypt 1995 - Dar Alnahda Alarabiyah) Ch 120, 167
69 (2004) Dubai Cassation 6/2004 CA; (2007) Dubai Cassation 150/2007 CA
70 Sanhūrī (n 2) 111
71 150 (n 69)
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It is therefore advisable for main contractors to have a decennial liability contractual
warranty issued by the subcontractor in favour of the employer or subsequent purchasers.
This warranty, however, should not start from the date of taking over the subcontract
works but rather from the date of taking over the main works, covering the period from
taking over the subcontract works until the date of taking over the main works. A general
warranty can be agreed and applied between the main contractor and the subcontractor,
covering any defects that may be caused by the subcontractor in the subcontract works.72
3.9 Effects of the Termination of the Main Contract
The termination of the main contract for any reason would mean the termination of the
subcontract. A notice should be served from the main contractor to the subcontractor, as
per Clause 15.1 of the FIDIC Conditions of Subcontract for Construction 2011 – the
same applies in situations of contractual releases or discharges of any of the main
contract’s parties from their obligations, as per Clause 19.7 [Release from Performance
under the Law] of the FIDIC Red Book 1999, which includes situations of force majeure.
Clause 15.5 of the FIDIC’s Red Book 1999 further sets rules for termination by the
employer for convenience. These by default allow the main contractor to terminate the
subcontract for reasons of convenience. Clause 15.1 of the FIDIC Conditions of
Subcontract for Construction 2011 states that the main contractor may immediately and
by notice terminate the subcontract whenever the main contract is terminated. Clause
15.3 (ii) in particular provides that if the main contract is terminated for convenience,
then the subcontractor shall not be entitled to the payment of any loss or profit.
It is heavily argued that any such terminations should be performed in good faith, as
when the main contractor enacts the right of terminating the subcontract for the reason
that the main contract was terminated for the same convenience, this should observe
72 Masadeh (n 32)
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elements of good faith without prejudicing the rights and entitlements of the
subcontractor. In particular, subcontractors are entitled to certain compensation for loss
and damages if the termination of the main contract came as a direct result of the main
contractor. This means that if the termination of the main contract was on grounds caused
by the main contractor, then the main contractor should not be permitted to rely on its
own wrongdoing to terminate agreements with its subcontractors on the grounds of
convenience.73
3.10 Terms of Subcontract Insurance
Regarding the insurance by which a contractor or subcontractor arranges to provide
coverage against specified losses, damages, illnesses or deaths and the other insurances
covered by an employer (if any), the FIDIC Conditions of Subcontract for Construction
2011 propose that insurance coverage should not be duplicated through multiple policies
issued by the main contractor or subcontractor.
In many instances under subcontracts, it is common for contractors to require to be added
as ‘additionally insured’ parties under the insurance policies of their subcontractors,
covering their liabilities towards the employer and other third parties in terms of works
executed by the main contractors and their subcontractors. It should be noted that adding
main contractors as additionally insured parties under the policies of subcontractors will
not make them second insured parties, and the insurance provider would not indemnify
the additionally insured parties unless a claim arose as a result of the works of the named
insured. Therefore, having the main contractor designated as an additionally insured party
as a way of pursuing any coverage for loss or liability is a mistake.
In the above example, it is observed that it may be the responsibility of the main
contractor to insure some works, equipment or other items that are normally subject to
73 A. Gray ‘Termination for Convenience Clauses and Good Faith’ (2012) Journal of International
Commercial Law and Technology , v. 7, Issue 3, JICLT, 260-275
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insurance coverage. However, in many instances, the main contractor requires the
subcontractor to have such items or works covered in subcontractors’ insurance policies,
as long as insurance coverage has already been established directly by the main
contractor. The reason for this approach is because main contractors aim to avoid the risk
of tainting their own insurance records and hence maintaining reduced insurance
premiums.
3.11 Terms of Force Majeure Events
Force majeure is defined under the FIDIC conditions as certain exceptional events or
circumstances that were beyond the parties’ control; that were not known to the parties
before entering into the contract; that cannot be substantially attributed to the parties; and
that could not reasonably have been avoided.
The FIDIC Red Book 1999 sets some examples describing force majeure events under
Clause 19.1. UAE law has a different understanding of what constitutes force majeure,74
as it emphasizes that force majeure events can only be described as public events. This
causes some of the events described under the FIDIC conditions to not be considered
force majeure events in UAE law. Furthermore, it causes them to be considered as mere
contractual exemption clauses.
Whenever a force majeure event occurs in a subcontract relationship, the sub-contractual
terms of force majeure along with general legal principles will apply. The terms of force
majeure as laid out in the main contract should not be applicable in the absence of legal
rules unless the subcontract terms have made a reference to the force majeure terms that
are described under the main contract. A similar approach is adopted by the FIDIC
Conditions of Subcontract for Construction 2011 in Sub-Clause 19.1, which provides
that:
74 CTC, s. 249
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“The Provisions of the Main Contract Clause 19 [Force Majeure] shall apply to
the Subcontract”
When force majeure events occur between the main contractor and the subcontractor, the
applicable legal or contractual rules will apply. This occurs even under UAE law, where
public policy states that events are only considered as force majeure if they are public
events. UAE law considers the fact that the subcontract is strictly limited between the
main contractor and the subcontractor. The legal application would therefore pay no
attention to any obligations existing between the main contractor and the employer if, for
instance the force majeure event turned out to exist only between the main contractor and
the subcontractor, not reaching the relationship between the main contractor and the
employer.
For example, let us imagine a subcontractor performing both subcontract works and
extracting the raw materials from a particular geographical area. If a war breaks out in
this area, this would cause the subcontractor to have to extract raw materials from an
alternative area, which may be more expensive in terms of extraction works and
transportation. Here, the employer may not be aware of such unfortunate events, and the
main contractor will not be excused under the main contract from rendering its
obligations within the time, quality and prices previously agreed with the employer. On
the other hand, the subcontractor would certainly be entitled as per FIDIC clauses and
UAE law to a balancing remedy, such as reducing its obligations and/or increasing the
price obligations of the main contractor towards the subcontractor.
The question is therefore: ‘will force majeure events occurring upon subcontractors’
liabilities towards the main contractor constitute a force majeure event between the main
contractor and the employer?’ The answer would be ‘No’ because the force majeure
event did not directly affect the main contractor. Hence, even though a force majeure
event occurring for the subcontractor may legally or contractually increase the liabilities
of the main contractor, this still does not change the obligations of the main contractor
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towards the employer. The legal basis for this rule refers majorly to the principles of
privity of contracts.
However, will the answer to the question above change if the subcontractor was
nominated by the employer? Referring back to the liability of the subcontractor rules
towards nominated subcontractors as held by the Dubai courts, would legal analogy here
apply on serving the same principles on having the liability of the main contractor
towards the employer be reduced or exempted as a result of force majeure events arising
for the nominated subcontractor? The answer will perhaps still be ‘No’ because the
subcontractor, whether domestic, named or nominated, would normally not have any
hand in a force majeure event, unlike the events of defective construction or delays in
performance.
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Chapter 4 – Effects of Subcontract Dispute Resolution
Mechanisms
The dispute resolution mechanisms as agreed between the main contractor and the
employer may not necessarily be similar to the mechanisms agreed between the main
contractor and the subcontractor, considering that the works to be executed by the
subcontractor in favour of the main contractor may constitute a very small portion of the
overall main works, or perhaps it would be more appropriate to treat the subcontract
works under dispute resolution mechanisms that are different from the ones adopted in
the main document.
When it comes to arbitration in construction disputes, main contractors usually prefer to
incorporate the same arbitration terms as agreed with their employers in their subcontract
documents. The problem with this approach is that an arbitration dispute adopted
between the main contractor and the subcontractor may be related to the same dispute as
between the employer and the main contractor. Multiple arbitration tribunals may
therefore be formed for the same issue and dispute, leading to the issuance of multiple
arbitration awards that may or may not conform with one another. A subcontractor may
be successful in its claim against the main contractor while the main contractor may not
necessarily be successful in the same claim against the employer, and this is why the
construction industry introduced the idea of tripartite arbitration.75
The FIDIC Conditions of Subcontract for Construction 2011 advise (as an alternative
path to follow instead of its original terms) to remove all clauses related to DABs where a
dispute or disagreement is associated with a simple, non-complex construction
subcontract. The FIDIC conditions further advise two options for dealing with disputes or
disagreements arising between main contractors and subcontractors and set two
75 Gould (n 27) 9
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presumptions for them. The first presumption is associated with disputes that are not
closely related to any existing or expected claim falling under the main contract. The
second presumption is where the subcontract disputed works are closely associated with
any of the main contract claims. Here, the FIDIC guidelines advise that any
determination concluded by the engineer, any decision issued by a DAB formed under
the main contract or any arbitral award issued under the main contract should be
automatically binding on both the main contractor and the subcontractor under the
subcontract.
Sub-Clause 20.6 [Subcontract Disputes] of the FIDIC’s alternative proposals for
subcontract conditions provides that within 14 days of giving a notice of a dispute, the
contractor shall express its opinion on identifying the dispute as either a related claim or
an unrelated claim, and the subcontractor may raise its objection against the said main
contractor’s opinion on determining the nature of the claim or dispute. This latter opinion
will also determine how the dispute may be treated under the FIDIC guidelines as being
either a related or an unrelated claim. The subcontractor’s objection to the main
contractor’s determination shall be given within seven days from the date of receiving the
main contractor’s opinion, otherwise the main contractor’s opinion in this regard shall be
considered to be accepted by the subcontractor.
4.1 Related and Unrelated Claims
FIDIC has therefore differentiated between related and unrelated claims. This distinction
refers to whether a claim is related to a particular claim associated with the main contract
or not. FIDIC has explained that where the parties have a disagreement as to whether a
particular claim is related or not, the disagreement may be referred to a pre-arbitral
referee under the ICC Rules. However, the FIDIC Conditions of Subcontract for
Construction 2011 deal independently with unrelated claims, as seen in alternate Sub-
Clause 20.3, which presents certain rules and timeframes as to how unrelated claims may
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be settled privately between the contractor and the subcontractor without having to
involve the main contract engineer or the employer in the process. The situation is
different when it comes to solving related claims, as these require the main contractor to
forward such claims to the main contract engineer to reach an arrangement in fulfilling
the claim, as seen in the rules of alternate Sub-Clause 20.4 of the FIDIC Conditions of
Subcontract for Construction 2011.
Unrelated disputes and claims can follow and be associated with independent dispute
resolution mechanisms to be agreed between the parties of a subcontract. Unrelated
disputes will be subject to the ordinary dispute adjudication rules followed by the
ordinary agreed arbitration rules if any, while related disputes under the alternative
proposals can only be treated by the dispute resolution mechanisms that are identified
under the main contract. FIDIC has further left it under the obligation of the main
contractor to refer such related disputes to the DAB appointed under the main contract.
This is due to complications of privity of contract, where the subcontractor may not
directly be able to take action of a related dispute or to present arguments therein to be
reviewed by the DAB members who are appointed solely by the members of the main
contract.
For this reason, the main contractor shall and whenever possible involve the participation
of the subcontractor in any meetings or discussions with the engineer in reaching any
agreement concerning the subcontractor’s claims that are considered as related to the
main contract. However, if the subcontractor refuses or is not able to attend or participate
in such discussions, then any determination made by the engineer or any agreement
reached between the main contractor and the engineer may be subject to the approval of
the subcontractor. The subcontractor may express dissatisfaction with such agreements
and determinations within seven days from their dates, where such dissatisfaction
expressions will be deemed as notice of a dispute.
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However, it is provided that in the case of a subcontractor’s claim that is related to
additional payment demands, it shall be considered a condition precedent for such claim
to fall under the liability of the main contractor only if it was actually settled by the
employer towards the main contractor.
4.2 Alternative Mechanisms Associated with Related Claims
As proposed by FIDIC, in a related dispute or claim, the main contractor shall forward
the dispute to the DAB within the period stipulated under the subcontract, which may be
28 or 56 days (whichever is applicable). If the main contractor fails to take such action
within the period stipulated under the subcontract agreement, then the dispute may be
treated as an unrelated one, and the rules of unrelated claims will apply. This
determination will later allow the subcontractor to pursue the main contractor directly
under independent dispute resolution mechanisms without having to consider the
restrictions mentioned earlier in disputes associated with related claims.
However, if the dispute is referred to the main contract DAB and is considered as a
related one, then the main contractor will not only be acting for itself but also on behalf
of the subcontractor and for the benefit of both subcontract parties. The main contractor
shall further furnish any possible opportunity to allow the subcontractor to participate in
the main contractor’s written or oral submissions to the main contract DAB, adjudication
strategy and choice of legal representation. The subcontractor shall equally fully
cooperate with the main contractor and furnish it with all the information required to
enable the main contractor to pursue adequately an appropriate and legitimate claim.
A subcontract related claim will affect the procedural rules of the DAB appointed under
the main contract. For example, if the DAB members wish to extend the 84-day period to
render a DAB decision, then the main contractor should not immediately approve such an
extension without first consulting with the subcontractor. Equally, the main contractor
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may not reach settlement with the employer in relation to a related claim without prior
discussion with the subcontractor.
Once the main contract’s DAB decision has been issued, the main contractor shall notify
the subcontractor about this decision within seven days. In turn, within seven days from
the date of receiving the said notification, the subcontractor may notify the main
contractor of its dissatisfaction with the main contract DAB’s decision. Otherwise, the
DAB decision will be final and binding upon the parties of the subcontract, unless and
until it is revised under settlement or an arbitral award, whenever such further
mechanisms are reached.
If the subcontractor expresses its dissatisfaction with the main contract DAB’s decision,
then the main contractor shall also express its dissatisfaction with the DAB’s decision
under the ordinary procedures brought in the main contract agreement. Otherwise, should
the main contractor not concur with the dissatisfaction of the subcontractor, should fail to
forward and equally express its dissatisfaction with the DAB decision in a timely manner
to prevent the decision from becoming final, or should fail to take any action on this
matter, then the related dispute shall then be treated as an unrelated one.
The alternative proposals of the FIDIC Conditions of Subcontract for Construction 2011
have been expanded to include Clause 20.9 [Employer’s Claims under the Subcontract],
which was not inserted in the original contract’s terms. This clause proposes the policy of
the main contractor defending the rights or status of the subcontractor against claims of
the employer that are related to the subcontractor’s performance. Basically, many of the
same assurances granted to the subcontractor under the main contractor’s or the
subcontractor’s related claims are also provided in cases of the employer’s related claims
by the subcontractor being proactively involved in such related determinations.
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Chapter 5 – Conclusions and Recommendations
It is clear from a legal point of view that subcontracts are distinctly remote and separated
from main construction agreements in terms of rights and obligation due to the well-
established rule of privity of contracts, which is widely recognized under both common
and civil law systems. The rule that ‘a contract cannot confer rights nor impose
obligations arising under it on any person except the parties to it’ is seen as the default
principle when dealing with any right or obligation of the parties of a construction
project.
With time, business requirements and social awareness have made it necessary to provide
certain exceptions to the rules of privity. The origins of such exceptions can be seen in
the form of the contracts and statutory rules that have been implemented as a result of
social requirements.
Despite the aforementioned distinctions between main and subcontract documents, and
the emergence and spread of use of exceptions to the privity rules to further strengthen
the protection of a particular party or parties of an agreement, a construction activity is
seen from a technical point of view as a unique and complex type of activity that should
not be treated like any other type of ordinary industrial practice. This uniqueness relies
very much on understanding the relationship and influences between each of the
construction parties, which may include the owner, the main contractor, the subcontractor
and the supplier.
In this regard, the exceptions to the privity rules discussed may seem as if they were
introduced solely to protect the rights of a particular group without considering the
collective welfare of not only the project parties but also the future users of the project
and other surrounding third parties. Perhaps this is where innovative and sustainable
procurement methods could offer solutions: methods such as partnering, energy
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performance contracting, public–private partnerships and performance information
procurement systems.
It is further concluded that when looking at a construction project from both legal and
technical points of view, it would be almost impossible to ignore the natural forces
produced by all project parties and the exchanges performed among them before, during
and after the project’s construction phase. This is particularly true in relation to
subcontractors that may be performing a large portion of a given project, as is usually
seen in most construction works worldwide. Whether such works are small or big, local
or international, one cannot treat the rights and obligations of each project member on an
independent basis.
Based on these conclusions, and as suggested by many scholars and philosophers, each
right and obligation of the contractor, subcontractor and owner should be, to some extent,
interrelated, coherent and collaborated with one another in an attempt not only to serve
the protection of one particular party but also to serve or improve the protection of the
rights and obligations of all parties combined, including the welfare of the project itself.
Construction contract drafters, negotiators and those who are associated with construction
activities and tendering processes, whether lawyers, engineers or employers, should
consider interrelating some of the common general terms in main and subcontract
documents, especially for projects that mainly rely on having a number of specialized
subcontractors on board. It is recommended that consideration should be given to the
common internationally recognized construction terms described in Chapters 3 and 4 of
this dissertation: conditional payment clauses, liquidated damages, deadlines and dispute
resolution mechanisms, as well as the sub-issues derived from these.
End of Dissertation
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Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
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Student ID: 120004 71
Understanding the Mutual Influence of Contract and Subcontract Terms on Construction Relationships
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Word count: 17,281 including footnotes and references